Business and property joint ventures – Thais and foreigners – inequality and power – www.property-report.com, February 22, 2013
…“I will terminate your employment as an ‘investor’ ” If you haven’t structured your joint venture properly, or the directorships issue hasn’t been well thought through, then aside from your actual shareholdings, you may find that your position could be seriously weakened simply by a termination of your involvement in the joint venture. As a shareholder, you just have rights to a profit if one occurs. Without any involvement in the joint venture, the remaining joint venture partner could easily start to move business elsewhere, and contrive to ensure the existing business does not make much of a profit, ever. This would leave you back at the position of having to sue. You would only be entitled to compensation for unfair dismissal, and a long drawn out battle over ‘valuation’ of shares may then ensue whilst you are not involved in the very business you invested in…
[This article has disappeared from online. Here is the original full text.]
Business and property joint ventures – Thais and foreigners – inequality and power
Feb 18, 2013
Balance is one of the hardest objectives to achieve, in life and in business. In Thailand, due to the way in which laws are drafted and enforced, foreigners and Thais in business generally have an inequality between them. The reality is that this can be in favour of the foreigners, or in favour of the Thais in such an arrangement, regardless of the intentions of the law. Over the last 10 years, I have seen the ways in which a lack of equality, or balance, can seriously damage investments, and not only have I witnessed others experience this business phenomenon, but I have personally experienced it too. There are of course, plenty of positive outcomes to investments, but these perhaps occur when more caution is applied at the outset of an investment and throughout its course.
When I first studied joint ventures back in the days of university and as a post-grad, I recall that most of the textbooks described joint ventures like ‘marriage’. The parties “need to get to know each other”, the parties “need to describe their relationship” and “set out their wishes” so they are clearly understood. This all seemed very trite and patronising at the time, but the reality is that there is a lot of truth in the sage of those textbooks.
In the real estate, hospitality and leisure markets in Thailand, the majority of investments require some form of joint venture. This can be through shareholdings, contractual relationships, or a combination of those. Although this article focuses on real estate, the principles of joint venture pretty much apply to most business relationships. It is worth mentioning that under certain frameworks, such as the Board of Investment (BOI) framework, joint ventures might not be necessary, but I don’t deal with that in this article.
We are all familiar with the 49:51 rule. In fact, in many relationships I have seen, Thai joint venture partners like to have a lot more than just 51 percent of a company. This is not a criticism, because in many countries, nationalistic control-hungry tendencies also dictate the business behavior of many. The investment and legal climate in Thailand is very much centered towards providing majority power, and majority control, to Thai persons or businesses. The Foreign Business Act, the Land Code and a host of other legislation give support to that notion. This may change gradually under the Asian Economic Community system to be implemented in stages at the end of and post-2015. The attitude of many business people also gravitates towards the notion that foreign investment, no matter how high, does not warrant proportionate control, rewards or return on investment.
However in many investments it may be that one party, such as the foreign party, may invest significant sums of capital. Part of this capital may be needed to invest in land on which a project is being built, a hotel is being developed, a manufacturing site built. Furthermore, that party may also re-invest sums instead of drawing out profits from the project as they go along. The issue between unequal joint venture partners then becomes about how the minority partner, who has invested more capital or even just effort, obtains the correct reward. In accounting terms of course, capital may be share capital, and what I am talking about is total sums of monies invested, which can be loans, assets, know-how and all sorts of items, which can be quantified as ‘capital’ investment. How this is quantified and set out in terms of return on investment should be defined very precisely.
Typical power struggles
In order to obtain a good result, it is sometimes worth analysing the more negative aspects of a potential investment. Here is a list of matters I have seen create serious investment issues over the years
“Powerful family syndrome”
Time and time again, I have heard clients, often exceptionally gifted, well educated and experienced business people, extoll the virtues of a new found connection in Thailand. I should emphasise that this occurs in other countries too, not just in my home. Such connections are heralded by the foreign business partner as beneficial to ‘getting things done’; to smoothing the way for ensuring that milestones occur on time, or simply for the fact that knowing a group of powerful and wealthy people confers prestige and recognition on the foreign business partner which may assist with their success.
What is so obviously missing from the analysis here, is that should there be a dispute, or abuse of power or control, then clearly the foreign partner will be the weaker party, and all of the connection and power held in such high esteem previously, will simply turn against the foreign partner in the face of adversity.
So, back to the textbooks, joint venture is indeed like a marriage, and choose your partner carefully. It is not always so clever to have an inequality of power.
“General accounting principles”
Money going into a project, is generally viewed differently than monies coming out of a project. A handshake, a nod of agreement regarding a common understanding, the clinking of champagne glasses and polishing off that fine dining experience can all seem so alluring in the swanky lobbies of nice hotels or the private business suites of completed real estate projects.
However, the treatment of capital, expenses, employment of persons with conflicts of interests, can all seriously affect the bottom line of return on investment for a partner.
Here is a list of typical issues in relation to accounting principles I have witnessed first hand in joint ventures:
Dividends not properly declared to ‘mitigate’ tax, resulting in inability to properly close the accounts at the end of any given year
Cash in the bank is split between the parties, before a proper reckoning up of the liabilities of the joint venture
Employees, such as family members of one of the joint venture parties, are gifted jobs, but without properly contributing to the financial performance of the joint venture
Foreigners might resist becoming or even be advised not to be directors, due to the complex work permit issues involved, especially when there are multiple companies in a group of companies. This means that the foreign party will have a lack of control on signing off on the accounts of a company, key issues slipping them by and not within their control
Internal accounts might not match, at all, filed accounts
Unauthorised expenses can affect the bottom line – expensive cars; expensive offices; expensive overseas trips. If none of this was properly determined at the outset of a joint venture arrangement, then one or more parties could be taken by surprise by the approach of another party to these matters. Conversely, other more important investments might be seen as unnecessary, by the very party who has indulged in unnecessary expense. Unfortunately, a good shareholders agreement is not enough on its own to combat this issues. Banking controls split between the parties can assist here, provided the issue on directorships doesn’t override such banking controls.
Megalomania stunting creativity, initiative and growth
One party, due to its alleged power or simply inequality of power, may perceive its role as all encompassing, all powerful, completely to the detriment of the minority shareholder but keep this attitude initially well hidden. The issue here may also be that this is not how the investment was presented or conducted for a significant period of time. The test of this issue normally comes in times of stress on the joint venture or one or more of the joint venture parties.
Marketing programs, advertising, keeping the joint venture fresh and productive, developing employees’ careers and creating good business plans can all be stunted and hindered by one party seeking to exercise megalomaniac control over all aspects of the joint venture. This can create a culture of oppression, with all eyes on the megalomaniac figure for decisions in even the smallest micro aspects of a business.
One way to reduce this issue if it is discovered a megalomaniac exists in the joint venture arrangement, is to form a group to dampen the urge to exercise unreasonable power in an arrangement and to introduce decision making systems which prevent one party dominating all. This may of course not be possible if the worst-case scenario has already occurred or if the other persons in the joint venture are weak and easily dominated.
Internal systems v presentation of the business
A good friend of mine pointed out to me that some of the most successful business people he knows are non-demonstrative about the extent of their wealth. CEOs of companies like IKEA, he said, take the bus to work, and ensure that they remain connected to the people they work for. This is quite a strange concept to certain Asian businesses, although that is a very sweeping generalisation, and there are many exceptions to this. However, the matter of ‘face’ can mean that a company not performing very well could still have a fleet of expensive cars for its top level management, or an excessive amount of office space completely underutilised. This happened in the UK in relation to certain large companies, who had invested heavily in property assets, only subsequently to have to find ways to raise capital to ensure their businesses survived in the face of economic adversity. This created the ‘sale and leaseback’ trends in the UK for many years for public and private companies and these deals were the only way such companies were able to survive. They created a lot of work for property lawyers.
It is good sense to present a business with a positive face to the market. However, the market will quickly see through a façade if there is no substance to a project. Nice advertising and swanky offices do not mean good internal systems which might benefit the customers, buyers or investors of a joint venture project.
This is the biggest issue, and most pertinent issue to legal services companies who see clients enter into disputes, even after years of perceived stablility in a joint venture. Unfortunately, the test of character, integrity, honour and ethics of parties are seriously challenged in times of disagreement or dispute, and this can be very revealing about the nature of the joint venture parties. If only it were possible to have a ‘trial dispute’ before entering into a joint venture to see how parties behave, many more joint ventures would survive and be successful.
Here are just a few of the dispute phenomenon that can occur:
“Sue me, this is my country” I have heard this or heard reports of this in the United States, the UK and elsewhere. It is not unique to Thailand. However, in Thailand, this can of course be a significant issue for an investor who might be relying upon business visas, might not be in Thailand all the time to attend court, and might also need the joint venture business to facilitate a work permit. The way to mitigate this is to have agreements which are well drafted, which is often not the case, and to select arbitration in a well respected and convenient venue. My British blood (I guess mixed up blood given the amazing multi-cultural nature of Britain) immediately gives way to thoughts of ‘forum conveniens’ – the forum which is most convenient, for a trial or dispute as a good solid principle to base forum selection upon.
“I will terminate your employment as an ‘investor’ ” If you haven’t structured your joint venture properly, or the directorships issue hasn’t been well thought through, then aside from your actual shareholdings, you may find that your position could be seriously weakened simply by a termination of your involvement in the joint venture. As a shareholder, you just have rights to a profit if one occurs. Without any involvement in the joint venture, the remaining joint venture partner could easily start to move business elsewhere, and contrive to ensure the existing business does not make much of a profit, ever. This would leave you back at the position of having to sue. You would only be entitled to compensation for unfair dismissal, and a long drawn out battle over ‘valuation’ of shares may then ensue whilst you are not involved in the very business you invested in.
“Let the business become Insolvent, and see what happens next” This one is the old ‘cut off your nose to spite your face’ scenario. Business disputes in joint ventures can become so heated, that one party can elect to simply test the other party’s resolve and financial position to see if they are prepared to become bankrupt in Thailand. Clearly, a foreigner becoming bankrupt in Thailand is not going to be able to recover in quite the same way as a Thai business partner might. This is true in other countries too.
“Buy me out at a high value, or I will buy you out at a low value” This scenario could be dealt with by strong valuation mechanisms, ‘tag along’ and ‘drag along’ rights in a Shareholders Agreement, with strict codes relating to the timing and sincerity of a buy out offer. The issue for the minority investor is that their monies might be tied up in the very assets of the joint venture which are under dispute, thereby weakening their negotiating position in this situation.
Gangsterism This is very controversial, and is not often written about other than in the national newspapers. However, it is true that business disputes can result in death, injury and family tragedy, and the boundaries in a foreign country for a foreign investor might not be the same in their home country. Crimes are committed all over the world relating to business, and Thailand should not be singled out for such an issue. However, as this is an article about what can happen, I can say that I have seen reports of Human Resource Managers being shot in the head simply for dismissing the wrong employee and I am sure many readers have seen reports across a wide spectrum of business issues of violence. This is such a global issue in many respects, but in times of stress, personal threats can be made to a party, simply to undermine their negotiating position, make them feel uncomfortable contemplating dispute, and can be a very nasty card to throw on the table in the event of a dispute. What is the solution – well, there is no clear solution, but here are some tips:
research in written form, the business experiences of others with your joint venture partner. What was their experience during an exit. If your potential joint venture partner is very secretive about the nature of a previous split, this may be a clue to an issue. Hindsight can be unfortunately revealing but useless.
research the temperament of your joint venture partners when things go wrong. Try some test scenarios in a low value investment, and see what happens to establish whether you would be prepared to make a larger investment.
Establish a base of support in Thailand, away from the central business you have invested in. This can be difficult, if the joint venture requires a lot of your time and efforts. However, ensure that your connections; your base of business friendships and other friendships, go beyond your main business venture partners. This can often serve as a warning to a business partner resorting to underhand tactics, that they are under scrutiny, and others are observing their behavior which may affect their own future in business.
This is a rare article in which I have focused on some quite negative aspects of joint venturing, and I generally keep a very positive view about investment in Thailand. The real estate, hospitality and leisure industries have lots of amazing people working within them, Thai and foreign, and the majority of business is clearly successful, as reflected in the continued growth of the economy, and the continuing waves of foreign investors all seeking to share a part of Thailand’s success. Within such an environment, I simply believe that caution should be exercised to the degree that listening to other’s more negative experiences, can help you steer a path to successful joint venturing and investment.
I have avoided focusing on the documents required to assist make a joint venture successful, because every good lawyer should have a list of these permanently emblazoned in their mind, but more commercially minded lawyers will be aware of the broader range of issues affecting or potentially affecting a joint venture arrangement. In real estate, try to control the assets, prevent them from being sold or damaged, ensure they are presented through marketing channels in the correct and cost efficient way, manage your cash flows, revenues and profit distribution through internationally accepted accounting principles. The check list is almost but not quite endless of protective measures that could be taken to ensure better equality, more fairness, and non-abuse of power in joint venture arrangements.
About the Author:
Desmond Hughes is a Senior Partner at Hughes Krupica, an International Legal Services firm specializing in real estate, hospitality and leisure. He can be contacted at [email protected]